What You Need to Know About Debt Management Plans

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  • Debt management plans are a popular form of debt consolidation.
  • A credit counseling agency will arrange a plan with your creditors, and then you’ll make a single payment to your agency.
  • Debt management plans can take up to five years to pay off.

If you find yourself in debt, it’s important that you find the most effective solution possible for clearing your debt and getting your life back on track.

While it might not be the right choice for everyone, many people can benefit from enrolling in a debt management plan.

What You Need to Know About Debt Management Plans

A debt management plan is a way of negotiating with your creditors to help you pay off your debt. If you want the most beneficial plan, it’s important to work with the right debt management company.

Here are a few things you need to know about debt management plans so you can able choose the option that best fits your needs and budget.

What Is a Debt Management Plan?

While many people have heard of debt management plans, few understand exactly how they work and why they’re a good choice for those dealing with debt.

Let’s take a look at a few of the features of debt management plans that anyone dealing with creditors should understand.

One misconception of a debt management plan is that they work like loans. But debt management plans aren’t loans, which means you don’t have to worry about loan approval, closing costs, or having good credit to land the lowest interest rates.

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Debt management companies that offer these plans will negotiate with your creditors to help you deal with your unsecured debts. In most plans, your monthly payments, as well as your interest rates, will be lowered so you’re able to pay off your debt faster, with lower monthly payments.

Your plan will include a payment schedule that will allow you to clear your debt within three to five years.

An important thing to remember is that debt management plans are only available for unsecured debts, which means debts that are not backed by any form of collateral. The most common forms of unsecured debt include:

  • Student loans
  • Credit card debt
  • Certain medical bills

If you enroll in a debt management plan offered by a credit counseling agency, you’ll make your monthly payments to the agency instead of your creditors. Once the payment has been received, the credit counseling agency will pay your creditors based on the negotiated schedule.

Benefits of a Debt Management Plan

Now that you know the basics of how a debt management plan works, it’s time to examine some of the benefits of enrolling in one of these plans.

Enrolling in a debt management plan could be a good choice for anyone who wants to consolidate their credit without applying for a loan.

Another benefit of debt management plans is that they can help you to pay off your debt a lot faster than you might be able to otherwise. In most cases, you’ll be finished paying off your plan in five years, which is a lot shorter time period than you would likely need while trying to clear your debt on your own.

Enrolling in one of these plans can also make it a lot easier for you to pay your bills. If you’re like most people in debt, then you’re probably paying multiple creditors at once. Once you’ve been enrolled in your plan, you’ll only need to make one payment, which is a lot easier and less stressful.

Finally, a debt management plan can end those pesky calls from creditors and debt collectors. After your plan has been arranged, your creditors will know that they will be paid, which means they no longer have the incentive to harass you with letters or frequent phone calls.

Disadvantages of Debt Management Plans

Debt management plans, while certainly beneficial, aren’t the right choice for everyone. Let’s take a look at some of the cons of debt management plans so that you can decide if enrolling in a plan is the right solution for your debt.

The biggest disadvantage of debt management plans is that they’re only eligible for certain types of debt. While these debts are a good choice for people dealing with credit card debt or unpaid medical bills, they can’t be used for people who are in debt to the Internal Revenue Service (IRS). If you have unpaid tax obligations, you’ll need to find some other solution for dealing with your debt.

Another disadvantage of debt management plans is that they can restrict your financial freedom to a tremendous degree. For instance, while it’s true that these plans usually only take five years to complete, during those five years you won’t be able to secure any new lines of credit or even use your current credit cards.

Finally, you should only enroll in a debt management plan if you’re sure that you’ll be able to make your monthly payments on time and in the correct amount. If you miss even a single payment, your debt management plan will be canceled and your interest rates will return to what they were before your plan was in place.

Who Can Benefit From Debt Management Plans?

Whether or not enrolling in a debt management plan is the right option for you largely depends on the type of debt you’re dealing with. Let’s take a look at a few different types of people who might want to consider enrolling in a debt management plan from a qualified credit counseling agency.

One of the most important factors to consider is your unsecured debt versus your annual income. If the amount of unsecured debt that you owe is equal to between 15% to 39% of your income, then a debt management plan may be right for you. This is because having debts equal to this percentage of your income can make it extremely difficult for you to pay your bills.

You may also want to enroll in a debt management plan if you earn a steady income but your high interest rates are making it hard for you to pay off your debt. With a lower interest rate, it will be much easier for you to pay off the principal of your debt so that you can get clear from your creditors.

Finally, if you believe that you have enough income to pay off your debts and live your life without having to open new lines of credit, a debt management plan can be the right decision for you.

Are There Any Alternatives to Debt Management Plans?

If you decide that a debt management plan isn’t the right choice for you, you still need to find some solution for handling your debt. Fortunately, there are several alternatives to debt management plans you can choose from, meaning you should be able to find an option that fits your financial situation.

If you have good enough credit, for example, then a debt consolidation loan may be a better option than a debt management plan.

A debt consolidation loan works similarly to a debt management plan in that you’ll make one payment each month instead of multiple payments.

But debt consolidation provides you with a little more flexibility.

First, you’ll be able to choose the length of your loan. Second, you’ll still have the ability to use your credit cards and open new credit lines if necessary.

For some people, declaring bankruptcy may be the best solution for getting out of debt. In particular, if you have so much debt that you don’t believe you’d be able to pay it off in 5 years, or if your total amount of debt is more than 40% of your annual income, bankruptcy can be a good tool.

Bankruptcy can clear some of your debts, and once the process is over, your credit score should start to rebound relatively quickly.

Choosing a Credit Counseling Agency

If you’re interested in getting out of debt by enrolling in a debt management plan, you first need to find a credit counseling agency. You should remember that not all counseling agencies are created equal, so you need to do your research to choose the highest quality agency possible.

The best idea is to work with an agency that is a member of either the Financial Counseling Association of America or the National Foundation for Credit Counseling. Both of these organizations have strict requirements for their members, including:

  • Independent accreditation
  • High standards for counselor quality
  • Certification

Once you’ve settled on an agency, you’ll need to decide how you’ll receive your credit counseling services. For some people, meeting with a counselor in person is the best option. This is especially true if you have a large amount of debt across multiple creditors, which would require your counselor to view a variety of financial documents. If you don’t want to meet your counselor face-to-face, many agencies also offer services online or over the phone.

There are a few other factors that you should keep in mind when choosing a credit counseling agency. First, different agencies charge different fees for their services, so you should research your potential costs before committing to an agency.

You should also research the laws in your state related to debt management. In some states, it’s possible that debt management may not be your best option.

Lastly, consider your financial need. If you’re dealing with a small amount of debt, there are better solutions than signing up for a debt management plan.

What to Expect From Your Debt Management Company

Before you meet with your credit counselor for the first time, it’s a good idea to know what to expect from your meeting. First and foremost, you should be ready for your credit counselor to discuss every area of your financial life. In addition to your existing debts, your counselor will want to know about:

  • Your income
  • How much you pay for housing (rent or mortgage payments)
  • The amount you pay in utilities
  • Other financial obligations

At some point during your meeting, your counselor will check your credit score and then review the information on your credit report with you. Fortunately, unlike some other credit checks, this will not have any impact on your credit score.

Once your counselor has a clear picture of your financial standing, they’ll give you advice for improving your situation. They may point out areas where you can cut spending and they may also offer you solutions for increasing your monthly income. Your counselor can also provide you with free educational resources you can use to help improve your financial situation.

If you would still have a negative cash flow after implementing your counselor’s suggestions, they will usually recommend a debt management plan. If you agree that enrolling in such a plan is the right option for you, your counselor will create a budget proposal and then send it to each of your creditors.

Hopefully, your creditors will approve this proposal, but it’s also possible that they will recommend revisions or reject the plan.

You will also be given the opportunity to review the budget proposal and either accept or reject the terms. Both you and your creditors need to agree on several factors before the plan can move forward:

  • The amount of the monthly payment
  • The fees you will pay
  • The length of the debt management plan

If all parties agree to the plan, you will usually need to provide your credit counselor with your bank information. With this information, your counselor can set up your payments to automatically come out of your account each month. The money will first go to your credit counseling agency and will then be disbursed among your various creditors.

You’ll need to sign an agreement with your creditors before your debt management plan can begin. You can either sign and return your agreement by mail or sign and return it using email. Email is usually the better option because it’s quicker than standard mail, which means your debt management plan will start sooner.

After your program has started, you’ll receive regular updates from both your counseling agency and your creditors. Make sure to compare statements that you are sent from your agency and your creditors to ensure that payments are being made and recorded correctly.

If you’re ready to get your debt under control, Solvable can help. We have reviewed some of the top debt management companies in the country so that you’ll have easy access to the information you need to choose your company. You can also read our library of research articles to learn more about different debt management solutions.

 

Jill Bridges
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Jill Bridges

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